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Tax liabilities from the grave reduced

It
often happens that a taxpayer makes use of a trust as a planning tool to reduce
potential estate duty liabilities in future. The
major problem with any estate is that the value of growth assets increases with
time leading to an increase in estate duty. A method frequently used to address
this increase in estate duty includes the transfer of a growth asset to a
family trust. A planner (the testator) who disposes of
growth assets to a trust and leaves the purchase consideration as a loan owing
by the trust, limits the value of property in his estate to the amount of the
consideration still owing to him by the trust at the date of his death.

Upon death the testator will normally, in his will, waive loans owed to him
at the date of his death. Until recently the discharge of a debt in this manner could trigger a
capital gain for the trust in terms of par 12(5) of the eighth schedule where
the testator bequeathed the loan to the family trust and the debt was cancelled.
Paragraph 12(5) provided that where a debt owing by a
debtor to a creditor was reduced or discharged the debt was treated as a deemed
disposal in the hands of the debtor with
a base cost of zero, and proceeds
equal to the amount of debt reduced or the amount discharged. This meant that
the amount of the loan written off by the testator would be deemed proceeds
(with a base cost of Rnil) in the hands of the trust. The court
also confirmed the application of par 12(5) in such a situation in ITC 1793.

Planners therefore had
to make sure the loan was not cancelled in favour of the family trust as this
would lead to capital gains tax in the hands of the trust. Ways to avoid this
situation included leaving the loan to another heir (not the trust) or awarding
the loan to the trust as part of the residue of the estate.

Fortunately,
amendments were made to the Act which will apply to tax assessment periods that
commence on 1 January 2013 and thereafter. According to the new provisions a trust
is not expected to incur an additional income tax liability as a result of the
waiver of debt owed to a deceased. Instead the capital gain will be set off
against certain specified amounts.

The
prescribed process that relates to the offsetting of a capital gain depends on
the type of asset that was initially acquired and consequently generated the loan
account. If the asset is still in possession of the trust, the capital gain
will reduce the base cost thereof. If the base cost is completely diminished
and the trust was not entitled to claim a capital allowance on the asset, the
final requirement is to reduce any assessed capital loss (if available) with
the remaining balance of the capital gain.

The
only instance where the trust may obtain accountability for normal income tax
implications is where it was previously allowed to claim a capital allowance on
the asset. Any capital gain that remains after the above process was carried
out will be included in taxable income as a recoupment. This means that the
remaining balance of the capital gain will be taxed only to the extend it
exceeds capital allowances previously claimed on the asset.

If
the asset is no longer in possession of the trust the capital gain can only be
set off against an assessed capital loss. Any capital gain that remains will be
taxed as a recoupment only if it relates to an asset that previously qualified
for capital allowances.

When
a taxpayer considers estate planning, he or she must also take into account the
adverse tax implications that his decisions may have on the individuals and
entities he leaves behind. As far as the remission of debt is concerned, the
promulgation of the Act makes it less likely for the trust to incur an
immediate normal income tax liability. However, it must be noted that an
increase in future capital gains may be inevitable. This is due to the fact
that the base cost of an asset represents capital expenditure that will reduce
a capital gain that may arise from future disposal of the asset. The same
principle will apply where an assessed capital loss is reduced. It appears that
the trust will still suffer undesirable tax implications to a certain extent,
but the new rules definitely puts the trust in a more favourable tax position
than it would have experienced previously.

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.